Vedanta Resources Plc, controlled by billionaire Anil Agarwal, may cut output at its four-year-old aluminium smelter in India as it grapples with a shortage of raw material, two people familiar with the matter said.
Vedanta Aluminium Ltd’s plan to shut down its alumina refinery in Orissa due to scarcity of ore will leave the company without any domestic supply of the material to feed the smelter in its $9 billion complex, the people said, asking not to be identified because the matter is private.
Increased reliance on imported resources would boost costs for the company, forcing it to reduce aluminium production, they said.
A drop in output may further erode earnings from Vedanta’s aluminium business that fell 48% in the year ended 31 March, said Abhisar Jain, an analyst at Centrum Broking Pvt. Ltd. The prospect of a decline in aluminium premiums over benchmark prices in London also threatens to make it unviable to use alumina bought abroad to produce the metal, one person said.
The company operated the smelter at capacity as it benefited from high premiums in the physical market, said Mumbai-based Jain. “But if the premium falls then it will be a double whammy and the company may have to cut capacity utilization.” The premiums for aluminium in Japan, Asia’s biggest importer, for three months starting October rose to an unprecedented $254 a tonne on 9 November, according to Metal Bulletin. Rising fees may prompt more deliveries of the metal in the market putting pressure on the rates, the person said.
“Vedanta will idle its plant at Lanjigarh in Orissa for processing bauxite into alumina because it couldn’t secure enough ore to run the factory and as it failed to get permits to mine at Niyamgiri hills in the state,” it said on 4 September. The government in August 2010 rejected Vedanta’s plan to secure the raw material, citing the effect the mine would have on tribes and wildlife.
Steel Authority of India Ltd, the country’s second biggest maker of the alloy, will stop work at an iron ore mine in Orissa to make way for an elephant corridor, according to two people familiar with the matter. Importing alumina will raise Vedanta Aluminium’s production cost by 5% to $2,100 a tonne, according to Centrum’s Jain. The company reported a loss of $242 million in the six months ended 30 September. The smelter in Jarsuguda in Orissa has a capacity to produce 500,000 of aluminium. “Vedanta has approached us for purchasing alumina and we have asked them to participate in our tenders,” B.L. Bagra, finance director at National Aluminium Co. Ltd, said last week. About 4 tonnes to 5 tonnes of bauxite ore are needed to extract 2 tonnes of alumina, from which one tonne of aluminium can be produced, according to the European Aluminium Association.
“The smelter is facing shortages and uncertainties with regard to supply of alumina,” Arun Kumar Bhatt, spokesman in New Delhi at Vedanta Aluminium said in an e-mail. “If in the coming months we are forced to shut down the refinery due to bauxite constraints then it will have its adverse impact on the operations of the smelter as well.”
Earnings before interest, taxes, depreciation and amortization (Ebidta) at Vedanta’s aluminium business fell 48% to $182.5 million in the year ended 31 March, according to the company’s annual report.
Vedanta Aluminium’s Ebidta may turn negative on higher raw material costs and as weak demand from China keeps aluminium prices from rising, said Niraj Shah, an analyst at Fortune Equity Brokers (India) Ltd in Mumbai.
“This will keep aluminium prices on the London Metal Exchange in a narrow range of about $2,000 to $2,200,” Shah said. “That’s not very attractive considering rising production costs.”
Vedanta Aluminium and group companies Sesa Goa Ltd, India’s biggest iron ore exporter, and Sterlite Industries (India) Ltd, the nation’s top copper producer, will combine into Sesa Sterlite, Vedanta Resources said on 25 February.
Agarwal is seeking to merge the companies to cut costs as he prepares for an $8.67 billion acquisition of Cairn India Ltd.
Vedanta has risen 4.6% in London trading this year, while Sterlite has advanced 10%.
Sesa Goa fell 1.8% to Rs.170.40 in Mumbai on Thursday.
Vedanta Aluminium, which plans to more than double the smelter’s capacity to 1.75 million tonnes, is evaluating options to start the new portion of the plant, group chief executive officer Mahendra Singh Mehta said during Vedanta Resources earnings call on 8November.
Agarwal’s plan to boost aluminium production has been affected by India’s crackdown on illegal mining and emphasis on environmental issues.
Agarwal, 60, began to build his metals empire by acquiring copper-cable producer Shamsher Sterling Corp. from the king of Nepal in 1979.
He added Australian copper mines in 1999, aluminium and zinc producers over the next three years and iron-ore exporter Sesa Goa for $981 million in 2007. Bloomberg